With Bobby Bonilla set to begin receiving payments from the
Mets in July 2011, the story of his contract has made headlines quite a bit
recently. The negative attention that Fred Wilpon, Jeff Wilpon, Steve Phillips, and the
entire Mets organization have received is misinformed and unjustified. Former pitcher Bret Saberhagen has a similar deal with the Mets that pays him until 2029 and it is rarely mentioned. Just yesterday, I was
reading through one of my favorite Mets blog's, the Daily Stache, and came
across this post written by Brian Smith, which condemns the Mets organization for agreeing to such a poor deal. While Brian makes good points, the common theory of comparing the original sum of money to the new sum of money is a mistake.

Barton Silverman / NY TimesFred Wilpon has taken it on the chin for the buy out given to Bobby Bonilla which goes into effect July 2011.

I go against the grain of public opinion on this topic
and will explain why I believe that the rationale behind Bobby Bonilla's buy-out made economic sense and baseball sense. The most puzzling aspect of the
entire saga is the Mets decision to bring Bonilla back for a second tour of duty
in the first place. That is a topic for another day.

For those who are not familiar with Bonilla's current contract
with the Mets here is a brief breakdown. The Mets decided it best to buy out
the remaining $5.9 million dollars of Bobby Bonilla's contract in January 2000.
Instead of paying him the $5.9 million dollars at the time, they struck a deal
where payments would be deferred until 2011. Commencing in July 2011, Bobby Bo
is to receive $1.19 million per year until the year 2035. To the naked eye the
Wilpons got taken to the cleaners on this deal. While they could have paid him
$5.9 million to go away, they now owe him a grand total of almost $29.83
million. Bonilla certainly loved the deal: "That beautiful
thing," he said. It certainly is a nice deal for a professional athlete with many expenses to be paid in distributions over such a long period of time. It also allowed Bobby's taxable income to be spread out over a long period of time rather than paying a greater amount in the lump sum. Also, when digesting this information, keep in mind that this is a very special circumstance. 99.9% of the population can not afford to defer income for 10 years and allow their employer to collect income on what is essentially now an investment.

Let's take a look at the Mets' possible thinking when formulating such a buyout.

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A dollar today is worth more than a dollar
tomorrow. $5.9 million dollars in the year 2000 can not be compared to $29 million in 2035. What was a gallon of gas in 1975? What is a gallon of gas today? Pretty vast difference from a percentage standpoint. When structuring Bonilla's contract, the Wilpon's assumed an 8%
interest rate, which was actually half a point below the prime rate at the
time. While interest rates have plummeted due to the recent recession, 8
percent was fair at the time given the prime rate. I direct you to the spreadsheet below.
You can see that using a discount rate of 8% would have the Mets actually come
out on top by about $16,000 in terms of REAL dollars as opposed to nominal
dollars. You can adjust the interest rate by 2 basis points in either direction
and it doesn't make a huge difference. Essentially, by using simple present value calculations, the two options are a wash.

View full sizeAdam MeshellMets Management and Bobby Bonilla came to a fair deal

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One of the reasons behind the Mets being so
desperate to get Bobby Bonilla off of the books was to bring in more productive
players. DanDotLewis at Amazin Avenue mentions that the Mets were able to obtain Mike Hampton with the cash that was freed up by deferring Bonilla's payment. Mets management also felt that Bonilla was a negative influence in the clubhouse, punctuated by "poker-gate" in the 1999 playoffs. The Mets were convinced that they were on the verge of being a great
team, and this theory was proven somewhat correct as they advanced to the World
Series in 2000. Playing three rounds of playoffs without a doubt brought in
millions of dollars in revenue. On top of ticket sales and concessions, the team had
increased goodwill which leads to increased merchandise and future season ticket sales. By investing the saved money back into the team the Mets
possibly recouped the nominal dollar amount owed to Bonilla in one season.

I welcome corporate finance professionals to poke holes in my math, as that is a major possibility.

Obviously having Bobby Bonilla on the payroll for 25 years is a bit of an eye sore, but Mets management does not deserve the proverbial beating they have taken in the media.